The Dell-ASUS story that Harvard University’s Clayton Christensen refers to as ‘a greek tragedy’ is a good example to understand the different, and sometimes competing, types of value creation. In short, the story starts with Dell outsourcing circuit and motherboard manufacturing to ASUS.
Pleased with the financial result, later, Dell starts outsourcing supply chain and product design work too. Every time Dell outsourced capabilities to ASUS the share price went up. This happened because the share price is influenced by an indicator called RONA (return on net assets). Dell was able to hit on its sales goals but now it had fewer assets on its books. The problems for Dell started when ASUS decided to launch its own computers line. This move was a blow to Dell’s stock as the company was now incapable of responding quickly to this change. In an effort to save the company he founded, Michael Dell took the company off the US stock exchange. The total value of this transaction was estimated at approximately $25 billion.
Businesses increase in complexity with the growth from start-up to scale-up and later to enterprise. With complexity, sometimes the distance between the employees and the customer is increasing too. In some cases the distance becomes so great that for the employees, what’s left of the customer is a number in an Excel sheet. So value creation becomes a blur.
Faced with the dilemma of optimizing for long-term versus short-term reward (e.g.: salary, bonus, promotion, dividends etc.) employees start getting confused.
When talking about value creation, startups tend to understand it in its most pure form. Customer value creation is what drives most startups.
As the operations grow in complexity, customer value creation gets mixed and diluted, because stock prices are based on complex formulas. Hence, sometimes, in corporate context, the concept of value creation might refer solely to shareholders.
For existing business models, customer value creation is not a necessary condition for shareholder value creation. The reverse statement is also true.
The claim here is not that shareholder value creation should be a function of customer value creation alone. Nor that the two forms of value creation are mutually exclusive. Running highly efficient operations is as important as creating desirable products. The problem is the asymmetry between customer value creation and shareholder value creation in the share price. Which in time is leading to a shift of focus, from customers to shareholders.
Forced to juggle with this asymmetry, and knowing the volatility of the stock market, executives face a dilemma: which value creation to prioritize for. Furthermore, in particular industries such as oil & gas, tobacco, defence or alcohol the dilemma can also be an ethical one.
‘A business that makes nothing but money is a poor business’ – Henry Ford
Not all corporate functions can be customer value creation functions. For example, facility management, human resources or accounting – they are import corporate functions but they only impact customer value creation indirectly. This doesn’t mean they should not ask themselves ‘how are our activities adding value to the end customer?’. But for the rest of the company, the question of ‘how will the customer benefit from this?’ should be centre stage.